Why 2014 Could Be The Best Year For Growth Since Bill Clinton Was President

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Published 9:58 am, Sunday, January 5, 2014

Note: Near the beginning of each year, I find it useful to jot down a few thoughts on how I expect the economy to perform. This isn't to test my forecasting skills - sometimes I learn more when I miss a forecast (As an example, I've spent a significant amount of time looking at the participation rate and demographics since I've been overly pessimistic on the unemployment rate the last few years).

1) Economic growth: Heading into 2014, it seems most analysts expect faster economic growth. So do I. Will 2014 be the best year of the recovery so far? Could 2014 be the best year since the '90s? Or will 2014 disappoint?

First, here is a table of the annual change in real GDP since 1999. Since 2000, the fastest real GDP growth was 3.8% in 2004, and the fastest growth for the recovery was 2.8% in 2012.

It is likely that 2014 will be the best year of the recovery, and possibly (with some luck) the best year since Clinton was president.

There is still some austerity at the Federal level (and cutting off emergency unemployment benefits is bad economic policy). Also, there are always downside risks from Europe and China, rising interest rates and more, but with all these positive trends I'd expect a pickup in US growth in 2014.

In 2012 (the best year of recovery for GDP growth so far), Personal consumption expenditures (PCE) only increased at a 2.5% real rate, compared to 3.8% in 2004 (best year since 2000). I expect PCE to pick up again into the 3% to 4% range, and this will give a boost to GDP. This increase in consumer spending should provide an incentive for business investment. Add in the ongoing housing recovery, some increase in state and local government spending, and 2014 should be the best year of the recovery with GDP growth at or above 3% (4% is not impossible).